Whopping Rs 3,500 crore blow to OMCs for just 10 days of fuel relief; operating profit in Q3 to take hit

On Monday, the entire Rs 2.5 a litre relief on diesel prices, including Re 1 per litre loss absorption by OMCs, got erased after 10 consecutive hikes due to higher crude oil prices and the depreciating rupee.

The OMCs may be looking at Rs 3,500 crore blow to their operating profit in the October-December quarter following the government’s decision to reduce fuel prices. (Image: Reuters)

By the tenth day, the relief provided by the Narendra Modi government on diesel was gone but the oil marketing companies (OMCs) might still suffer a loss of Rs 3,500 crore in operating profit in the third quarter, a report has shown. On Monday, the entire Rs 2.5 a litre relief on diesel prices, including Re 1 per litre loss absorption by OMCs, got erased after 10 consecutive hikes due to higher crude oil prices and the depreciating rupee.

The OMCs may be looking at Rs 3,500 crore blow to their operating profit in the October-December quarter following the government’s decision to reduce fuel prices by asking oil companies to absorb losses by Re 1 a litre on October 4, Crisil said in a recent report.

The government also announced excise duty cut of Rs 1.5 a litre on both petrol and diesel, while also asking states to reduce Value Added Tax (VAT) by Rs 2.5 a litre. A dozen states, including Gujarat and Maharashtra, followed centre’s footsteps and announced the relief, giving a total relief of Rs 5 a litre.

“As things stand, average gross marketing margins of the OMCs on diesel and petrol have come off from Rs 3 per litre in the closing quarter of fiscal 2018 to Rs 2.60 per litre in the second quarter this fiscal due to the uptrend in crude prices. Given this, our calculations indicate that the Re 1 per litre blow will shave 100-130 basis points off the OMCs’ operating margins and a Rs 3,000-3,500 crore decline in operating profits this quarter,” Prasad Koparkar, Senior Director, Crisil said.

Even though operating profits of OMCs had surged in the first qaurter of FY19 driven by higher marketing margins, the companies “could be looking at a 15% dent” in the second quarter due to fall in marketing margins on account of higher crude oil prices, the report warned, adding that this will lead to a further 18% drop in the third quarter.

Moreover, the oil companies are also looking at the notional loss of Rs 20,000-22,000 crore on-year and Rs 42,000-47,000 crore on-year due to the under-recovery burden on LPG and Kerosene.